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This publication is available at https://www.gov.uk/government/publications/loan-schemes-and-the-loan-charge-an-overview/tax-avoidance-loan-schemes-and-the-loan-charge
Loan schemes – the facts
Loan schemes - otherwise known as ‘disguised remuneration’ schemes - are used to avoid paying Income Tax and National Insurance.
HMRC has never approved these schemes and has always said they don’t work.
The loan charge works by adding together all outstanding loans and taxing them as income in one year. The result is that you’re likely to pay tax at higher rates than you would have at the time you were paid in loans. If you settle your tax affairs before the loan charge arises you will pay tax at the rates for the years you received the loans.
The loan charge policy is expected to protect £3.2 billion, which can be used to support our public services.
An estimated 50,000 people have used a loan scheme that will be affected by the loan charge. Most of them work in the ‘business services’ industry – this includes jobs like IT consultants, financial advisers and management consultants. Read more detail about who’s affected.
We want to make sure everybody pays their fair share of tax and contributes towards the vital public services we all use.
People who have used these schemes have a choice – they can:
- repay the original loan
- agree a settlement with HMRC
- pay the loan charge when it comes in to force
Find out more about what people need to do.
We also want to help people who have used these schemes to get their tax affairs right - there are a range of flexible payment options for those who may have difficulty paying what they owe.
How loan schemes work
People who use these schemes have their salary paid in loans, instead of being paid in the usual way.
Normally, when you’re given a loan, you have to pay it back, often with interest added.
But these loans are paid to people in such a way that means it’s unlikely that they’ll ever have to be repaid. In other words, the person receiving money from a loan scheme gets to keep it all. And, they don’t pay any tax on this money, even though it’s clearly income.
It’s highly unusual to receive your salary in loans and is clearly a method used to avoid paying tax.
The loan charge
The loan charge was announced at Budget 2016. The policy ensures users of tax avoidance loan schemes pay their share of tax and is expected to protect £3.2 billion for the UK’s vital public services.
The charge will apply to disguised remuneration loans that are outstanding on 5 April 2019.
HMRC is encouraging people in these schemes to come forward and settle their tax affairs before the loan charge applies, as it is likely to be more beneficial for them.
Who needs to pay
The disguised remuneration rules apply to everybody who entered into this type of tax avoidance arrangement, regardless of their income, employment status, or the job they do.
If an employer set up a scheme then the tax liabilities will fall to them and not the employee. HMRC will only seek payment from the employee if it cannot be collected from the employer, for example where the employer no longer exists or is off-shore. In these circumstances HMRC would collect the liabilities owed from the employee, who benefited from the scheme.
HMRC has a legal duty to collect the tax owed. It would be unfair to the honest majority of taxpayers if avoidance scheme users escaped paying their share of the taxes that pay for our vital public services such as the NHS, police, and social services.
Paying what’s owed
Anybody who wants to settle and who hasn’t already contacted HMRC, should do so immediately.
To stand the best possible chance of settling people should get in touch with HMRC and send all the required information as soon as possible. This will provide the best chance of reaching a settlement before the loan charge arises on 5 April 2019.
HMRC wants to make it simple for people and will help anybody who wants to get out of these schemes. There are a range of flexible payment options for those who want to settle ahead of the loan charge but who may have difficulty paying what they owe.
For instance, scheme users who currently earn less than £50,000 and who are no longer using a tax avoidance scheme are able to agree a payment plan of up to 5 years without having to supply detailed supporting information about their income and assets.
For those who need more time to pay what they owe, earn £50,000 or more, we can work out a manageable payment plan based on their personal circumstances.
HMRC has an outstanding record for supporting those facing genuine difficulty, but who want to do the right thing.
Only a tiny minority of the UK population will be affected by the loan charge.
Of those affected, 65% work in business services, which includes IT consultants, financial advisers, and management consultants. Fewer than 3% work in medical services (doctors and nurses) or teaching and fewer than 2% work in the social and community services sector.
When taking into account the loan they received, loan scheme users have on average twice as much income as the average UK taxpayer, and 70% of users have used a scheme for 2 years or more. The tax bills for people who have repeatedly used schemes will be higher than those who have used them once.
|Medical and education services||3%|
|Other professional and technical services||2%|
|Social and community services||<2%|
|Other financial activities||<2%|
|Other transport and storage||<2%|
Note: figures will not add to 100% due to rounding.
The loan charge will only apply to outstanding loans.
The loan charge was announced in 2016, giving loan scheme users 3 years to get their affairs in order.
The average amount avoided was £20,000 per year, per person and a large number used a scheme more than once. The tax avoided on their income would have provided them with the luxuries and lifestyle that other people on a similar income, who paid their taxes in full and on time, could not have afforded.
Less than 1% of scheme users have an outstanding loan before 2003 and about half of scheme users have received a loan within the last 7 years.
Promoters of tax avoidance
A small minority of tax advisers bend the rules and encourage their clients to pay less tax than is legitimately due.
Promoters of these schemes can sometimes make false claims, such as the arrangements are ‘HMRC-approved’ or they are ‘compliant with the tax rules’. Anybody who feels as if they’ve been mis-sold a financial arrangement should seek legal advice.
HMRC is working hard to tackle tax avoidance in all its guises and a core part of our strategy has been to firmly challenge the people who promote these schemes. New legislation has been introduced every year since 2014 to help HMRC take on the promoters and enablers of tax avoidance schemes.
HMRC has opened tens of thousands of enquiries since these schemes started. As a result, thousands of users have paid what they owed and have stopped using avoidance schemes.
Approximately 250 different disguised remuneration schemes will be affected by the loan charge. These schemes are detailed and complex. Users try to conceal their true income and they require careful and thorough investigation, as well as the co-operation of the person who used the scheme.
So far over 24,000 scheme users have registered an interest to settle their tax affairs. HMRC has set up dedicated email and phone lines to help users settle and is working hard to bring all live cases to an appropriate conclusion.
Attempts to avoid the loan charge
Some people will inevitably try and get around paying the loan charge which is likely to land them in more trouble.
HMRC is currently aware of several schemes that claim to get around the charge and is warning people not to use them. These schemes do not work.
Beware of tax avoidance
The vast majority of taxpayers aren’t involved in tax avoidance.
These schemes are sold with promises that are simply too good to be true and people need to be cautious when entering into any financial arrangement.
Strengthened rules mean users of defeated tax avoidance schemes now have to prove they took reasonable care over their tax return otherwise they could face a penalty of up to 30% of the tax avoided. It places the onus on users to check what they’re entering into is legitimate and makes sure they take steps to protect themselves. This is no different to what anyone would do when entering into other major transactions, such as buying a house or making a sizeable investment.
Steps that show an individual has taken reasonable care might include getting a second independent opinion, or conducting their own research into the financial arrangements they’re entering into.
There is a range of more detailed information on disguised remuneration schemes available:
- Information on how to settle
- detailed settlement terms
- 10 things a promoter of tax avoidance won’t always tell you
- information about tax avoidance
- information about disguised remuneration
- Spotlight 44 – disguised remuneration schemes affected by the loan charge
Tax Information and Impact Notes: